Alan Kohler
A dawn of false hope
General Motors is the "but…" that comes after the sentence: "There are some encouraging signs of recovery."
So there are, but… the ninepins are still falling, and are now moving from real estate to industrial firms; from retrenching credit to retrenching people.
So far, the credit losses have mostly been confined to banks and other financiers, but they are spreading. Bondholders have been protected by government bailouts, but that source of succour is becoming exhausted.
Next, if GM goes bust, will be the councils and charities that invested in synthetic CDOs because they were stamped with the letters A and B. Synthetic CDOs count defaults – more than eight or nine of 100 firms listed in each, and you lose all your money. GM is one of the 100 in all CDOs, and most of them are already up to seven, and still counting.
Fiscal stimulus and money printing has produced a sharp jolt that has papered over the economic cracks and produced some not-so-bad statistics lately, as well as a bear market rally/new bull market.
Gerard Minack of Morgan Stanley in Sydney pointed out this morning in a note to clients that the dramatic global production declines in the December quarter were an overshoot, exceeding the decline in consumer spending.
But the production and trade cutbacks that resulted from the credit shock of last September/October are now turning into job losses, which will make consumer spending catch up with production cutbacks, unless the tugboats of fiscal stimuli can turn around the Queen Mary.
Also, some industries are in more trouble than others. Airlines, for example (see this morning’s shock from Qantas).
And carmakers. The New York Times says GM has been told by US Treasury to prepare for a formal, "fast, surgical", bankruptcy, whatever that might be.
The idea, apparently, is for a "good car company" and a "bad car company" to be created, and the good one, containing all of GM’s best assets, would come out of bankruptcy within a few weeks. The bad one would be liquidated gradually with the government making up the shortfalls in some or most of the liabilities, including health care and pension liabilities to the workers.
GM’s efforts to stay out of bankruptcy have failed because the United Auto Workers union has refused to make concessions unless the bondholders make some too. They have both been asked to accept equity in return for their debts but, unsurprisingly, have politely declined. In the end they will have no choice.
There will be a lot of that in 2009 – trading the obligations and promises of debt for the hopes and fears of equity.
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